Error correction model: Difference between revisions

Revision as of 20:32, 23 August 2017

Revision as of 08:08, 29 August 2017

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If they are both integrated to the same order (commonly I(1)), we can estimate an ECM model of the form

: <math> A(L) \, \Delta y_t = \gamma + B(L) \, \Delta x_t + \alpha (y_ty_{t-1} -\beta_0 - \beta_1 x_tx_{t-1} ) + \nu_t. </math>

''If'' both variables are integrated and this ECM exists, they are cointegrated by the Engle–Granger representation theorem.